A global tax deal is coming, and things will never be the same again

Using the company’s 2020 annual report as a platform, Pichai informed shareholders that the tech major’s products have helped researchers fight the coronavirus pandemic, empower individuals to build their careers and serve customers. Pointing to the expanding role of digital technologies for small businesses and, at the same time, the near-term business prospects of the search giant. This is something that tax officials will not miss.

Alphabet is also aware of this. It warned its shareholders that the traditional global tax system is changing with many countries including India digital service tax and participating in a new global initiative to modernize tax rules. The tech giant anticipates a major risk that such a move could trigger: future earnings could be negatively impacted by muted earnings in markets that have lower statutory tax rates and higher than anticipated in others. Statutory tax rates are relatively high.

In other words, the risk that lies ahead for some of the largest global corporations is a potential change in the way markets recognize benefits and costs in financial statements. This is something that can also prompt changes in how multinational corporations (MNC) are structured.

At its core, the ongoing tax dispute is based on a simple principle—firms should be taxed in the jurisdictions where they make their profits. Until now, MNCs could form a set of legal entities registered in multiple countries and eventually report a substantial portion of their revenue to jurisdictions with very low tax rates. Since there was no global agreement, individual countries had to compete with each other by lowering corporate tax rates, which US Treasury Secretary Janet Yellen recently described as a “race to the bottom”.

Now, stunned by the pandemic’s impact on government finances, most nations have suddenly found an equal footing. And a framework proposal is ready, on the basis of which further talks will take place.

India on July 2 welcomed the broader nature of a tax deal approved a day earlier by a majority of members of the Organization for Economic Co-operation and Development (OECD) and the G20 grouping. New Delhi was in favor of a consensus solution “that is simple to implement and easy to comply with. At the same time, the solution should result in meaningful and sustainable revenue allocation for market jurisdictions, particularly developing and emerging economies.” For, the Finance Ministry then said, assuring that it would work with other countries for an implementation plan by October.

The OECD, which is drawing up the blueprint for the global deal, expects a final plan to be ready soon, with implementation scheduled for 2023. With India’s digital economy expected to grow rapidly over the next few years, the stakes for the Indian exchequer are quite high. . The new tax structure specifically attempts to deal with digital economy firms as they do not easily fit into the traditional concept of corporate taxation, which relies on a fixed place of business in the market.

This will be very important for tech giants like Amazon, Facebook, Google and Netflix, which have a massive customer base in the country. The talks will also provide a convenient platform for the Indian government, which pioneered the concept of digital taxation in 2016 by levying a one-way digital service tax called the Equalization Levy on online advertisements. This has subsequently been expanded to cover the sale of goods and provision of services through e-platforms.

Since India’s move to impose a similar levy, several other countries – such as France, Austria, Chile and the Czech Republic – have seen an increase in services delivered remotely by offshore firms to local clients.

“Proposed changes to global tax rules, including a minimum corporate tax rate of 15% and allocation of taxation rights to countries where global digital firms have consumers, such as India, are likely to have far-reaching implications. Vikas Vasal, National Managing Partner (Tax), Grant Thornton Bharat LLP, said the way global companies do business. Experts are also unanimous about the benefits to India under the new system.

what’s at stake?

The framework for the reallocation of digital economy taxation rights to consumer countries such as India will cover tech giants with global sales of over €20 billion and profitability (earnings before taxes/revenue) of over 10%.

The idea is to allocate 20-30% (above 10%) of the remaining profits of these corporations to the jurisdiction of the market. The condition that determines whether a market enjoys taxation rights is set at €1 million in revenue from that jurisdiction. For smaller markets with a gross domestic product (GDP) of less than €40 billion, the OECD has proposed a limit of €250,000.

Prima facie, India with a large consumer base should have a larger share of the pie than other market jurisdictions. However, it is difficult to estimate the amount of taxes flowing into India at this time, said Grant Thornton’s Vassal. Once the new system comes into force, countries will be required to repeal digital tax provisions in their domestic tax laws – such as the equalization levy in India.

see full image

Due to the high turnover limit, many companies will still not be liable to pay tax in the market jurisdiction. “Accordingly, it remains to be seen whether India rolls back its digital taxes for such companies as well,” Vassal said.

The recognition of profits and costs in the markets has been something that has seen a game of cat and mouse between businesses and tax authorities under the current tax laws. A common practice among many businesses is to own Intellectual Property Rights (IPR) with subsidiaries established in countries with low tax rates, say Ireland.

The right to use these intangible assets in markets where revenue is earned (but the tax rate is higher) includes the cost of the local subsidiary (paid to the entity based in Ireland) that generates profits there. Helps to keep it low. With national budgets under pressure from economic stimulus measures, governments around the world want a new playbook on taxation.

“The underlying principle is that the present system of attribution of a substantial portion of profits based on legal ownership of IPRs, irrespective of where the data (content) is actually consumed, needs to be modified to ensure that the Countries customers are located receive their fair share of taxes, explained Sudhir Kapadia, partner and national tax leader at EY India.

“While this change will be beneficial for India due to its large consumer base, a lot will depend on its actual implementation,” Kapadia said.

business impact

Experts say the new taxation structure could have a major impact on digital economy firms. Since these companies will in any case be paying taxes in the markets where consumers are located, this may encourage them to have physical proximity to their markets through offices to meet the unique preferences of each geography, partner Neeru Ahuja, Deloitte India.

EY India’s Kapadia said Indian IT companies with a global footprint in business would need to evaluate their existing business model and global allocation of their profits as the proposed amendment to the profit allocation methodology would apply to them equally.

In fact, Indian IT and Information Technology Enabled Services (ITES) firms could be a major point of leverage for the US in the ongoing negotiations. There will inevitably be efforts to make things difficult for Indian IT firms in order to secure better terms for the US-headquartered tech giant. A related aspect relevant to Indian IT firms is the proposed ‘offshoring’ tax of 10% on the base tax payable in the US, which is a part of the Biden administration’s tax proposals. Kapadia said this new provision, along with the proposed increase in the US corporate tax rate to 28 per cent from 21 per cent, would mean a tax outlay of up to 30.8% for US firms that provide offshore services to countries such as India.

Another element of the proposed new tax structure, supported by most countries, is the global minimum corporate tax rate, which is likely to be 15%. A dent in the appeal of some low-tax countries could add to India’s attractiveness at a time when New Delhi is offering tax incentives for setting up factories locally. The lowest corporate tax rate in India is 15% which new construction companies are eligible to claim. Since it is at par with the proposed global minimum tax rate, it is unlikely to impact new investments in India. On the other hand, Indian companies would be unwilling to set up intermediary firms in jurisdictions such as the United Arab Emirates (UAE) as India would get the right to tax profits in such ‘low tax’ jurisdictions under the proposed regime.

a spokesperson for Central Board of Direct Taxes (CBDT) said that India’s position on the OECD proposal is clearly articulated in the July 2 statement.

road ahead

However, it is not just tax regulations that are likely to reshape the tech industry. Anti-trust laws, data privacy laws and data localization regulations are also evolving.

Emails sent to Facebook and Google remained unanswered at the time of publishing details about the extent of revenue recognized through their Indian arms and the profit and tax contribution in India. But the trend seems to be of increasing physical presence in India.

Data available from the Registrar of Companies (ROC) shows that Facebook India Online Services Pvt Ltd, a subsidiary of Facebook Singapore Pte. Ltd., reported ₹892 crore gross receipts, paid in FY19 ₹49.7 crore in taxes and made a net profit of ₹105.8 crores – a jump of about 86% from the reported profits a year ago.

An Amazon spokesperson welcomed the OECD tax initiative and explained how the e-commerce group is investing in India and empowering small businesses, artisans, women entrepreneurs and startups, besides enabling access to local products for global customers. Contributing to making.

“Amazon is committed to digitizing 10 million small and medium businesses, facilitating $10 billion of exports by 2025, and creating two million direct and indirect jobs in the country by 2025,” the spokesperson said in a statement.

Grant Thornton’s Vassal said, “The current pandemic has forced multinationals across the world to reevaluate their business models and supply chains. This, coupled with major changes in the international tax regime, is likely to attract foreigners to India. Provides a unique investment opportunity.” Vasal said that with continued policy rationalisation, ease of doing business and a focus on more business-friendly policies, India should regain its position as one of the fastest growing large economies in the near future. While the OECD plan gives a broad outline of the new tax regime, many finer details remain to be negotiated. New Delhi’s question is clear: a sustainable plan that is easy to implement.